Tackling Scope 3 emissions: Time to shift to circularity

Scope 3 emissions are notoriously difficult to track. Comprising all emissions that occur upstream and downstream of a business – including supplier operations, the end use of consumer products, and even how debtors spend borrowed money – on average, Scope 3 accounts for more than 70% of a company’s value chain emissions.[1] But they are disclosed by only about one in five companies.[2]

A recent ING survey of 450 senior executives suggests that only 27% of businesses rank Scope 3 emissions reduction among their top three initiatives. One explanation for this is that reporting Scope 3 emissions has been largely voluntary to date. Today, however, the shift to mandatory reporting is well under way, with regulatory frameworks such as the EU’s Corporate Sustainability Reporting Directive (CSRD) set to come into force in 2024/25.[3]

Under the CSRD, some 49,000 European companies will be required to report their Scope 3 emissions. The International Sustainability Standards Board (ISSB) has also voted unanimously to make measuring and reporting Scope 3 mandatory.[4]

“It’s going to hit businesses and management teams sooner than they realise,” says Jacomijn Vels, global head of sustainable finance at ING.

Companies should be focusing on Scope 3 and seeking guidance now, or they won’t be ready in time to comply with mandatory reporting.

The circular economy, or circularity, which promotes the reuse of materials over a ‘throwaway’ culture, provides one of the most effective strategies for reducing Scope 3 emissions.[5]Estimates suggest that greater circularity in heavy industry could cut emissions across the sector by 56% by 2050.[6]

Joost van Dun, Circular Economy lead, and Jacomijn Vels, head of Sustainable Finance at ING.

Joost van Dun, circular economy lead at ING, explains how a circular economy can help reduce Scope 3 emissions:

• Using recycled materials in creating products will lead to using less virgin materials and thus reduces emissions associated with resource extraction and processing on the upstream side.
• The reduction of waste during the manufacturing process, as well as making sure products are taken back and reused or recycled at the end-of-life stage, will have a positive impact on lowering emissions.
• A circular approach can also reduce emissions during a product’s use-phase by encouraging ‘product-as-a-service’ business models, which make a single product accessible to multiple users – like renting tools at a DIY store or car sharing.
• There is also an increased focus on making products more easily repairable, which will extend the lifespan of products.

Despite the benefits of circularity for Scope 3, The Circularity Gap Report 2023[7] shows that industry is increasingly reliant on virgin materials.

The proportion of secondary materials in the global economy has dropped from 9.1% in 2018 to 8.6% in 2022, and to just 7.2% in 2023. Moreover, less than a fifth of respondents to a recent ING survey plan to prioritise the reuse and recycling of materials, and just 7% say that redesigning products and services to be more environmentally friendly is a priority in the next two years.

It is worth noting, however, that growing regulatory pressure, such as the EU’s directive on single-use plastics,[8] is likely to increase the use of circularity in the coming years. The directive requires companies to use at least 25% recycled plastic in PET beverage bottles from 2025, and 30% in all plastic beverage bottles from 2030. It also includes a 77% separate collection target for plastic bottles by 2025, which increases to 90% by 2029, through Extended Producer Responsibility (EPR) schemes.

EPRs are waste management schemes that hand the responsibility for a product back to the producer once it is no longer used. Currently, most EPRs apply to packaging materials, but countries such as France that have more developed schemes collect a wide range of items from consumers, including textiles and footwear, medicines, electrical equipment, batteries and vehicles.[9]

As well as regulation, finance solutions that are linked to climate-transition KPIs will provide a positive incentive for companies to adopt a circular business model.

“Through KPI-linked options, a company can receive discounted interest rates if it commits to a set of sustainability KPIs and can show its debtor that it is working towards those targets,” Vels explains.

The possibilities are vast: the percentage of recycled content in products, the amount of waste recycled, or even the number of products based on circular design.

Van Dun says that making progress on circularity and Scope 3 emissions can be beneficial for businesses from an investment standpoint. “The financial sector will increasingly favour companies that can show clear progress towards net zero goals and complete reporting transparency across all emissions, which will reduce investment risk for their portfolios,” he says.

Although regulation is the foundation for a shift to a circular economy, Van Dun says there is still a lot of work to do to realise the transition. Making financing available for circular businesses and models, as well as closing the loop in value chains with enhanced recycling infrastructure, will be critical.

“A circular economy needs a well-functioning market for secondary materials,” says Van Dun.

We need to scale up and enhance the infrastructure to collect, sort and recycle more materials than we currently do. Building out this infrastructure and developing new technologies to recycle a wider range of materials will require intensive collaboration between all parties in the value chain.

Products that are designed in such a way that they can be recycled at the end of life, as well as the use of recycled materials will create demand for recycled materials – from electronics to textiles and shoes. This will strengthen the business case for investing better in infrastructure and circular value chains.

Reducing Scope 3 emissions will require cooperation, harmonisation and transparency from all parties. “A coordinated approach requires a clear goal, and we need to start now,” Vels concludes. Both Vels and Van Dun agree that a well-developed and clear circular economy strategy, which connects businesses with each other and with their end-users, will play a big part in gaining greater control over and reducing Scope 3 emissions.

Society is transitioning to a low-carbon economy. So are our clients, 
and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate.